Why Are Pharmaceutical Drugs So Expensive In The USA?

Competition among individuals selling a good is necessary in order for prices to be reduced for a consumer, but the pharmaceutical industry often has patent protection when they bring a new drug to market The reason that the pharmaceutical industry receives patent protection is in order to encourage the companies within the industry to perform the R&D necessary to produce a new innovative drug. Without a patent, a company could spend vast amounts of time and money discovering a new drug, and a competitor could immediately steal the intellectual property without consequence or much cost. One solution for reducing drug costs would be to reduce the time of patent protection for pharmaceutical companies; this would reduce the amount of time that the company has a monopoly in the market. Researchers at the Harvard Medical School found that drug prices decline to approximately 55% of their original cost once there are two generic options in the market, and 33% of their original cost once there are five generic competitors in the market1.

Along with long patent lives, there are other non-competitive practices embedded within the pharmaceutical industry. Generic drug manufacturers must go through a long regulatory process before they are able to bring their drugs to the market (often 3-4 years). By reducing any regulation that is found to be minimally effective, generic drug manufacturers could increase competition in the pharmaceutical drug market at a more rapid pace. Additionally, the pharmaceutical industry currently participates in a practice known as pay-for-delay. With pay-for-delay, a generic drug manufacturer legally challenges what they view as a weak-patent, and in response the pharmaceutical company offers a financial out-of-court settlement to the generic drug manufacturer in return for the generic drug manufacturer agreeing to withdraw its challenge of the patent. This allows patents to be valid for a longer period of time than they might otherwise be.

Pharmaceutical drugs are often cheaper in comparative developed nations because their National Health Programs negotiate drug prices with pharmaceutical companies. Because these National Health Programs represent the population of a whole country, these governments have significant negotiating power with pharmaceutical companies. However, in the United States we do not have a nationalized healthcare industry – and for this reason the negotiating power of purchasing entities is reduced. Additionally, the largest purchaser of pharmaceutical drugs in the United States, Medicare, is not legally allowed to negotiate drug prices with pharmaceutical companies. Also, private insurers are mandated to cover a vast number of drugs which limits their ability to negotiate the prices of these drugs with pharmaceutical companies.

Along with limited negotiating leverage, countries with National Health Programs have more freedom to not cover certain drugs. As previously stated, there are many drugs private insurers must offer to their members regardless of the comparative effectiveness of these drugs. Medicaid must cover all drugs approved by the Federal Drug Administration, regardless of the effectiveness of the drug. On the other hand, European Nation Health Programs reject selling drugs that they view as offering limited value for the price; this puts greater pressure on pharmaceutical companies to demonstrate the comparative effectiveness of drugs and results in greater price pressure on their products. This greater freedom to reject selling certain drugs has not resulted in limited drug offerings in countries with National Health Programs; as of 2015, of the 29 major cancer drugs offered in the United States, 97% and 86% are also available in Germany and France respectively2.